Real Estate Private Equity investment & Preferred Equity loans

Private Equity investments are typically made by private investors mainly HNWI or by real estate private equity funds. These funds usually raise their capital from financial institutions such as pension funds, insurance companies, and special funds. They may also raise capital from collective investment schemes, HNWI, private property investors and different private tailor-made projects, which pools capital and investments from the whole market including corporate and private investors.

Real estate owners or developers often try to increase their leverage in their projects by financing their property projects with capital that is a 2nd position lien, and it is junior to the Senior and Mezzanine debt, but senior to the project sponsor equity. Preferred equity finance is used to achieve the highest leverage possible, sometimes up to 100% of total costs.

One of the advantages of preferred equity is the avoidances of the need of an inter-creditor agreement with the senior or Senior and Mezzanine lenders. The preferred equity lenders get a right to get a preferred rate of return and typically an upside on top of it at the end of the project.

For example:
A real estate developer has identified a development project to built new homes.
The project is a profitable project with a gross development value (GDV) of £ 11,200,000
His total costs (purchase and development) are £ 9,000,000
The developer has secured a senior loan of only £ 5,600,000, 62.22% loan to cost (Ltc)
Then he was offered a Mezzanine loan of £ 2,050,000
The developer has borrowed a combined loan of £ 7,650,000 and needs more £ 1,350,000 to realize the project.

Property finance partners have working relations with private equity lenders and funds and can structure the total capital that is needed and to raise private equity to the project. The capital amount can be up to 100% finance loan to cost.

There are different agreements with real estate private equity investors, as well as, with preferred equity lenders. Some of them require only a revenue share, and some of them require interest on the loan amount plus a revenue share. The pricing is on a case by case basis and depends mainly on the project profitability

We always match the private equity funds, and the lender’s strategy with the borrower needs. For example :

There are investment funds that their strategy is only to build or refurbish residential homes and to keep them for rental income (build for rent)

We recommend property developers that specialize in PRS schemes to raise equity from those funds because they offer the max benefits with three exit options to developers. They can buy them out, they can co-manage the portfolio, and the third option is to sell to a specialized REIT fund.

There is another type of equity funds that we, at property finance partners structure a mix of equity and debt for qualified developers and real estate project sponsors in which the fund provides between 75% to 100% finance of total costs for a revenue share.